1


                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON D. C.  20549

                                   FORM 10-Q



  X     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
        EXCHANGE ACT OF 1934

For the quarterly period ended             September 30, 1995
                               ---------------------------------------------

Commission file number                             1-71
                               ---------------------------------------------


                                  BORDEN, INC.

         New Jersey                                         13-0511250      
- -------------------------------                      -------------------------
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                           Identification No.)


                  180 East Broad Street, Columbus, OH  43215              
            --------------------------------------------------------
                    (Address of principal executive offices)


                                (614) 225-4000
            --------------------------------------------------------
              (Registrant's telephone number, including area code)


                                Not Applicable
            --------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report.)


Indicate by check mark whether the registrant (1) has filed all reports
required  to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes  X   No
    ---     ---

Number of shares of common stock, $0.01 par value, outstanding as of the close
of business on November 7, 1995:    198,974,994


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- ----------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME  (UNAUDITED)

BORDEN, INC
Three Months Ended September 30, ------------------------ (In millions, except per share data) 1995 1994 - ---------------------------------------------------------------------------------------------------- REVENUE Net sales $1,474.8 $1,624.5 - ---------------------------------------------------------------------------------------------------- COSTS AND Cost of goods sold 1,110.5 1,181.4 EXPENSES Marketing, general and administrative 360.5 421.3 Interest expense 30.0 38.0 Restructuring (reversal) (6.3) (40.3) Equity in income of affiliates (1.7) (4.5) Minority interest 1.4 10.2 Other (income) and expense, net 25.1 86.2 Income taxes (21.1) 11.3 --------- -------- 1,498.4 1,703.6 --------- -------- - ---------------------------------------------------------------------------------------------------- EARNINGS Loss from continuing operations (23.6) (79.1) Discontinued operations (net of tax): Reversal of loss from operations 0.4 7.3 Loss on disposal (58.7) Reversal of disposal reserve 29.7 --------- -------- Net income (loss) 6.5 (130.5) Preferred stock dividends (18.4) --------- -------- Net loss applicable to common stock $ (11.9) $ (130.5) ========= ======== - ---------------------------------------------------------------------------------------------------- SHARE DATA Loss from continuing operations $ (0.12) $ (0.56) Discontinued operations: Reversal of loss from operations 0.05 Loss on disposal (0.41) Reversal of disposal reserve 0.15 Preferred stock dividends (0.09) --------- -------- Net loss per common share $ (0.06) $ (0.92) ========= ======== Dividends per common share $ 0.075 Dividends declared per preferred share $ 0.75 Average number of common shares outstanding during the period 199.0 141.5 Average number of preferred shares outstanding during the period 24.6 - ----------------------------------------------------------------------------------------------------
2 3 - ---------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
BORDEN, INC Nine Months Ended September 30, ------------------------ (In millions, except per share data) 1995 1994 - ---------------------------------------------------------------------------------------------------- REVENUE Net sales $ 4,489.1 $ 4,629.7 - ---------------------------------------------------------------------------------------------------- COSTS AND Cost of goods sold 3,384.7 3,379.4 EXPENSES Marketing, general and administrative 1,059.9 1,128.5 Interest expense 106.6 102.8 Restructuring (reversal) (6.3) (40.3) Equity in income of affiliates (8.3) (9.4) Minority interest 14.8 29.4 Other (income) and expense, net 93.1 104.9 Income taxes (56.9) 12.7 --------- --------- 4,587.6 4,708.0 --------- --------- - ---------------------------------------------------------------------------------------------------- EARNINGS Loss from continuing operations (98.5) (78.3) Discontinued operations (net of tax): Reversal of loss from operations 8.8 23.4 Loss on disposal (58.7) Reversal of disposal reserve 67.6 --------- --------- Net loss (22.1) (113.6) Preferred stock dividends (40.5) --------- --------- Net loss applicable to common stock $ (62.6) $ (113.6) ========= ========= - ---------------------------------------------------------------------------------------------------- SHARE DATA Loss from continuing operations $ (0.52) $ (0.55) Discontinued operations: Reversal of loss from operations 0.05 0.16 Loss on disposal (0.41) Reversal of disposal reserve 0.35 Preferred stock dividends (0.21) --------- --------- Net loss per common share $ (0.33) $ (0.80) ========= ========= Dividends per common share $ 0.225 Dividends declared per preferred share $ 1.77 Average number of common shares outstanding during the period 190.3 141.5 Average number of preferred shares outstanding during the period 24.6 - ----------------------------------------------------------------------------------------------------
3 4 - ---------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
BORDEN, INC. Nine Months Ended September 30, ------------------------ (In millions) 1995 1994 - ---------------------------------------------------------------------------------------------------- CASH Net loss $ (22.1) $ (113.6) FLOWS Adjustments to reconcile net loss to net USED IN cash from operating activities: OPERATING Reversal of reserve for loss on disposal ACTIVITIES of discontinued operations (98.3) Depreciation and amortization 115.3 125.5 Unrealized loss on interest rate swap 31.1 Loss on sale of investment 22.0 Loss on disposal 46.0 94.7 Write-off deferred costs 14.0 Restructuring (27.5) (102.6) Decrease in receivables sold (140.0) Net change in assets and liabilities: Trade receivables (9.8) (108.9) Inventories (40.0) (56.3) Trade payables (19.8) 51.5 Current and deferred taxes (67.2) (2.8) Other assets 12.8 4.2 Other, net 6.7 147.9 Discontinued operations 3.3 (88.9) ---------- ---------- (33.5) (189.3) ---------- ---------- - ---------------------------------------------------------------------------------------------------- CASH FLOWS Sale of investment in RJR Holdings 282.1 FROM Capital expenditures (124.3) (102.0) INVESTING Divestiture of businesses 0.8 191.8 ACTIVITIES Purchase of businesses (7.0) ---------- ---------- 151.6 89.8 ---------- ---------- - ---------------------------------------------------------------------------------------------------- CASH FLOWS Reduction in short-term debt (202.4) (13.6) (USED IN) FROM Reduction in long-term debt (415.7) (57.1) FINANCING Long-term debt financing 3.3 220.9 ACTIVITIES Reduction in minority interest (471.5) Equity contribution 994.7 Dividends paid (25.0) (31.8) Issuance of stock under stock options and benefits and awards plans 3.3 1.1 ---------- ---------- (113.3) 119.5 ---------- ---------- - ----------------------------------------------------------------------------------------------------
4 5 - ---------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
BORDEN, INC. Nine Months Ended September 30, ------------------------ (In millions) 1995 1994 - ---------------------------------------------------------------------------------------------------- Increase in cash and equivalents $ 4.8 $ 20.0 Cash and equivalents at beginning of period 125.3 100.3 ----------- ----------- Cash and equivalents at end of period $ 130.1 $ 120.3 =========== =========== - ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL Interest paid $ 87.9 $ 109.1 DISCLOSURES Income taxes paid (refunded) 46.7 (6.1) OF CASH FLOW INFORMATION - ----------------------------------------------------------------------------------------------------
5 6 - ----------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (UNAUDITED) BORDEN, INC.
(In millions) September 30, December 31, ------------- ------------- ASSETS 1995 1994 - ----------------------------------------------------------------------------------------------------- CURRENT Cash and equivalents $ 130.1 $ 125.3 ASSETS Accounts receivable (less allowance for doubtful accounts of $16.0 and $13.6, respectively) 650.6 411.8 Inventories: Finished and in-process goods 377.2 331.0 Raw materials and supplies 198.1 183.9 Investment securities 281.1 Other current assets 159.5 249.8 Net assets of discontinued operations 40.5 --------- --------- 1,515.5 1,623.4 --------- --------- - ----------------------------------------------------------------------------------------------------- INVESTMENTS Investments in and advances to AND OTHER affiliated companies 81.1 86.9 ASSETS Deferred income taxes 354.8 284.0 Other assets 128.5 119.0 --------- --------- 564.4 489.9 --------- --------- - ----------------------------------------------------------------------------------------------------- PROPERTY Land 97.2 95.2 AND Buildings 595.8 574.2 EQUIPMENT Machinery and equipment 2,105.3 1,893.1 --------- --------- 2,798.3 2,562.5 Less accumulated depreciation (1,616.5) (1,455.6) --------- --------- 1,181.8 1,106.9 --------- --------- - ----------------------------------------------------------------------------------------------------- INTANGIBLES Intangibles resulting from business acquisitions 627.7 602.1 --------- --------- - ----------------------------------------------------------------------------------------------------- $ 3,889.4 $ 3,822.3 ========= =========
6 7 - ---------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (UNAUDITED) BORDEN, INC.
(In millions, except share data) September 30, December 31, ------------- ------------ 1995 1994 LIABILITIES AND SHAREHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------- CURRENT Debt payable within one year $ 129.5 $ 331.9 LIABILITIES Accounts and drafts payable 488.1 498.0 Restructuring reserve 41.7 87.1 Income taxes 101.2 146.3 Other current liabilities 532.7 465.9 ---------- ---------- 1,293.2 1,529.2 ---------- ---------- - ---------------------------------------------------------------------------------------------------- OTHER Long-term debt 1,228.4 1,379.0 Deferred income taxes 46.6 44.3 Non-pension postemployment benefit obligations 336.6 348.6 Other long-term liabilities 106.7 108.7 Minority interest 33.5 504.6 ---------- ---------- 1,751.8 2,385.2 ---------- ---------- - ---------------------------------------------------------------------------------------------------- SHAREHOLDERS' Preferred Stock - Issued 24,574,751 EQUITY (DEFICIT) and -0- shares, respectively 614.4 Common stock - Issued 198,974,994 and 194,983,374 shares, respectively 2.0 121.9 Paid in capital 312.7 120.0 Accumulated translation adjustment (116.8) (140.9) Minimum pension liability and other (107.3) (145.4) Retained earnings 139.4 201.8 ---------- ---------- 844.4 157.4 Less common stock in treasury (at cost) - 25,124,740 shares at December 31, 1994 (249.5) ---------- ---------- 844.4 (92.1) ---------- ---------- - ---------------------------------------------------------------------------------------------------- $ 3,889.4 $ 3,822.3 ========== ==========
7 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (dollars in millions except per share amounts and as otherwise indicated) 1. Interim Financial Statements The accompanying unaudited interim consolidated financial statements contain all adjustments, consisting only of normal adjustments, which in the opinion of management are necessary for a fair statement of the results for the interim periods. Results for the interim periods are not necessarily indicative of results for the full years. 2. Capitalization On March 15, 1995, two investment partnerships affiliated with Kohlberg Kravis Roberts & Co. ("the Shareholders") contributed 111,047,229 shares of RJR Holdings common stock in exchange for equity securities of the Company to be issued in the future. On June 26, 1995, the Company issued 24,574,751 shares of Series A Cumulative Preferred Stock ("Preferred Stock"). Each share has a liquidation preference of $25, and is entitled to cumulative dividends at an annual rate of 12%, payable quarterly in arrears. During the third quarter a dividend of $0.75 per preferred share was declared. This dividend was paid on October 16, 1995. The Company may redeem at its option the Preferred Stock, at any time in whole or from time to time in part after the date that is three years after the issuance date, at a redemption price per share of 107% in the first twelve months following such date, declining ratably in each year to par after the date that is 10 years after the issuance date, together with accrued and unpaid dividends thereon to the date of redemption. Common stock of the Company at September 30, 1995 consisted of 300,000,000 shares authorized and 198,974,994 shares issued at a par value of $0.01. At December 31, 1994, common stock included 480,000,000 shares authorized and 194,983,374 shares issued at a par value of $0.625. 3. Interest rate swaps The Company used interest rate swaps in the past to manage its floating interest rate exposure, and at December 31, 1994 the Company had outstanding swaps with an aggregate notional principal amount of $400.0 which hedged variable rate borrowings. Due to repayments of long-term debt these interest rate swaps no longer meet the criteria for hedge accounting. During the first quarter the Company terminated swap agreements with an aggregate notional principal amount of $200.0 at a cost of $6.1. The remaining outstanding interest rate swap agreement has been marked-to-market at September 30, 1995, which resulted in an unrealized loss of $31.1 being recorded for the nine months, and an unrealized gain of $1.5 for the three months ended September 30, 1995. 4. Discontinued Operations In December 1993 the Company announced a divestiture and restructuring program which included the divestment of several business segments. In April 1995, management decided to retain the remaining salty snacks business and in September 1995, management decided to retain the remaining business in the divestiture plan. As a result, the operating losses of these businesses previously classified as a discontinued operations have been reclassified to continuing operations with an offsetting net of tax credit in income from discontinued operations, which includes losses of $8.8 for the nine months and $0.4 for the three months ended September 1995. 8 9 As a result, the reserve for estimated loss on disposal of these businesses has been reversed, resulting in a net of tax income of $67.6 for the nine months and $29.7 for the three months ended September 1995. Due to management's decision to retain the businesses which were classified as discontinued at December 31, 1993, operating results for the period ending September 30, 1994 have been reclassified into continuing operations, which increased sales by $547.6 and $184.4 for the nine months and three months, respectively and decreased income from continuing operations by $23.4 for the nine months and $7.3 for the three months ended September 30, 1994. The offsetting $23.4 and $7.3 credits in income from discontinued operations include a tax expense of $14.3 and $4.5, respectively. 5. Sale of Accounts Receivable During 1995 the Company renegotiated certain terms in the credit line agreements under which it sells accounts receivable. Among the terms that changed were those which allowed the Company to sell accounts receivable without recourse. As a result of the change in terms, which now provide for the sale of receivables with recourse, the amount of receivables sold at September 30, 1995 of $250.0 is included in borrowings under the $1.2 billion credit agreement and shown as long-term debt in the consolidated balance sheet at September 30, 1995. The reclassification of the $250.0 of receivables sold from operating flows to financing flows in 1995 results in offsetting amounts which are not reflected in the Statement of Cash Flows since there is no cash impact. 6. Loss on Disposals During second quarter 1995 $20.0 was accrued for the estimated loss on disposal of seven dairies operating in the eastern half of the United States. Substantially all of this amount is a non-cash charge relating to the excess of net book value over expected proceeds. During third quarter 1995 $20.0 was accrued for the estimated loss on disposal of a plant, which is substantially a non-cash charge relating to the excess of net book value over expected proceeds; and an additional $6.0 was accrued for cash charges related to the 1994 divestiture of an international foods business. These estimated losses include management's best assessment of the amounts expected to be realized on the disposal of these businesses. The amounts the Company will ultimately realize could differ materially in the near term from the amounts assumed in arriving at the loss on disposal. 7. Other (Income) and Expense Other (income) and expense for the nine months ended September 30, 1995 include the following: Loss on disposal 46.0 Unrealized loss on interest rate swap 31.1 Loss on sale of investment in RJR Holdings 22.0 Write-off of deferred costs associated with the TMI investment partnership 14.0 General partner incentive (27.9) Other 7.9 ------- 93.1 -------
9 10 Other (income) and expense for the nine months ended September 30, 1994 include: Transition fees relating to merger 52.2 Writedown of two partnerships 25.6 Loss on disposal 12.9 Foreign exchange losses 19.5 General partner incentive (8.8) Other 3.5 ------ 104.9 ------
8. Contingencies and Uncertainties The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. In addition, the Company is conducting a number of environmental investigations and remedial actions at current and former Company locations. Each of these matters is subject to various uncertainties, and some of these matters may be resolved unfavorably to the Company. The Company has established accruals for matters that are probable and reasonably estimable. Management believes that any liability that may ultimately result from the resolution of these matters in excess of amounts provided will not have a material adverse effect on the financial position of the Company. For a further discussion of significant matters occuring during the quarter see Part II, Item 1, Legal Proceedings. 10 11 PART I FINANCIAL INFORMATION ----------------------------- Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 1995 VERSUS QUARTER ENDED SEPTEMBER 30, 1994 Net sales from continuing operations for the quarter ended September 30, 1995 decreased 9.2% to $1.48 billion from $1.62 billion in 1994. The Company reported a net loss applicable to common stock for the third quarter 1995 of $11.9 million, or $0.06 per share, after the effect of preferred dividends ($0.09 per share), compared to a net loss of $130.5 million, or $0.92 per share, in 1994. The net loss of $11.9 million in 1995 is primarily due to a decline in operating results for the quarter and charges relating to operations of $20.0 million ($12.2 million after tax) discussed below; $6.0 million ($3.7 million after tax) in Corporate charges relating to a 1994 divestiture; and the preferred dividend of $18.4 million paid for the quarter. These charges were partially offset by reduced interest expense of $8.0 million ($4.9 million after tax) resulting from the renegotiation of the credit line during the second quarter, and a decrease of $8.8 million ($5.4 million after tax) in minority interest expense related to TMI Associates, L.P. The 1995 tax benefit results from the expectation of the ability to offset current year expenses and operating losses against future income to reduce taxable income. The net loss of $130.5 million in 1994 was a result of the $94.7 million ($58.7 million after tax) loss on disposal of discontinued operations, the merger related expenses of $52.2 million ($49.8 million after tax), $25.5 million ($22.6 million after tax) for the write-down of two partnerships, $8.0 million ($5.0 million after tax) of expenses related to idle property, and $28.9 million ($22.0 million after tax) for the charge to operations for the write-off of goodwill which is discussed below. These 1994 charges were partially offset by a credit of $40.3 million ($25.0 million after tax) for the reversal of prior restructuring charges that management determined would not be utilized, of which $23.9 million relates to operations and is discussed below. The 1994 tax provision results from the non-deductibility of certain expenses incurred during the period from taxable income, partially offset by the expectation of the ability to offset operating losses against future taxable income. The loss from continuing operations for the third quarter of 1995 was $23.6 million versus a loss of $79.1 million in 1994. The credit in income from discontinued operations of $0.4 million in 1995 and $7.3 million in 1994 reflects the reclassification to continuing operations of the net operating losses related to the businesses previously classified as discontinued. Sales for Consumer Packaged Products (CPP) decreased 16.2% for the quarter to $656.3 million from $783.4 million in 1994, primarily as a result of 1994 divestitures. Substantially all International Foods continuing operations reported increased sales versus 1994. Sales for Niche Grocery products were down significantly from 1994 due to a change in sales strategy which is expected to shift a significant portion of seasonal sales from third to fourth quarter. North American Pasta Products reported mixed results, with the decline in pasta sales being partially offset by higher volumes in pasta sauces. Sales for the cheese, glue and salty snacks businesses declined slightly versus 1994. Operating results for CPP declined to a loss of $14.1 million for the quarter compared to operating income of $25.0 million in 1994 due to overall decreases in most businesses, as well as the $12.5 million of income recorded in September 1994 as a result of the reversal of unused restructuring reserves. Overall, results for International Foods businesses decreased, most notably for the whole milk powder group, which was affected by increasing raw material costs, strong competition and unfavorable foreign currency swings, especially in the far east. Niche Grocery results declined significantly, primarily due to 11 12 the change in sales strategy discussed above, as well as trade spending and customer deduction issues and other unfavorable costs. Pasta results declined significantly from prior year due to lower volumes, higher commodity costs, and increased provisions for trade spending. Increased pasta sauce profits from higher volumes were offset by higher consumer support programs to defend against new competitors in the premium sauce category. Operating results for cheese were comparable to prior year excluding the charge in third quarter 1994 to writeoff goodwill. Results for glue and salty snacks were down slightly compared to prior year. Sales for Dairy decreased 16.5% for the quarter to $267.6 million from $320.3 million in 1994, primarily due to closure of several plants in late 1994 and 1995 as well as volume declines in fluid milk and other products. Dairy's operating results for the quarter improved to income of $1.2 million from a loss of $15.7 million for 1994 due to reduced administrative and distribution costs which were offset by lower volume, as well as a $6.3 million reversal of unused restructuring reserves in September 1995. A significant portion of this cost savings relates to reduced depreciation and amortization expense as a result of the impairment loss recorded in December 1994. Sales for Packaging and Industrial Products (PIP) increased 5.8% for the quarter to $550.9 million from $520.8 million in 1994, due to increases in substantially all of the businesses. Sales of decorative products increased due to the startup of a new mass merchandise account and improved export sales. Sales of packaging products improved primarily due to price increases resulting from efforts to recover higher raw material costs. Results for the adhesives and resins group continue to exceed 1994 results. Operating income for PIP decreased 62.2% to $21.9 million from $57.8 million in 1994, primarily due to a charge of $20.0 million relating to anticipated losses on the disposal of a plant, as well as the $13.6 million of income recorded in September 1994 as a result of the reversal of unused restructuring reserves. Operating results for decorative products are down versus 1994 due to expenses related to the startup of a new mass merchandise account and to a decline in industrial and commercial products. Operating results for packaging products were flat compared to 1994. Operating results for the adhesives and resins group increased over 1994, which is a continuation of the strong performance demonstrated in earlier quarters. 12 13 NINE MONTHS ENDED SEPTEMBER 30, 1995 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1994 Net sales from continuing operations for the nine months ended September 30, 1995 decreased 3.0% to $4.49 billion versus $4.63 billion in 1994. The Company reported a net loss applicable to common stock for the first nine months of 1995 of $62.6 million, or $0.33 per share after the effect of preferred dividends ($0.21 per share), compared to a net loss of $113.6 million, or $0.80 per share in 1994. The net loss of $62.6 million in 1995 is primarily due to the net pretax charges of $136.8 million ($87.2 million after tax) discussed in the Company's June 30, 1995 Form 10Q, as well as the charges which occurred in the third quarter of 1995 and are discussed with the results for the quarter. The 1995 tax benefit results from the expectation of the ability to offset current year expenses and operating losses against future taxable income. The net loss of $113.6 million for 1994 is primarily a result of the charges which occurred in the third quarter of 1994, and are discussed with the results for the quarter. The 1994 tax provision results from the non-deductibility of certain expenses incurred during the period from taxable income, partially offset by the expectation of the ability to offset operating losses against future taxable income. The loss from continuing operations for the first nine months of 1995 was $98.5 million compared to a net loss of $78.3 million in 1994. Credits in income from discontinued operations of $8.8 million in 1995 and $23.4 million in 1994 reflect the reclassification of the net operating losses related to the businesses previously classified as discontinued. Year to date sales for Consumer Packaged Products decreased 12.9% to $1.92 billion from $2.20 billion in 1994 primarily as a result of 1994 divestitures. Substantially all International Foods continuing operations reported increased sales versus 1994. Sales for Niche Grocery products were down significantly from 1994 primarily due to the reasons discussed for the quarter. North American Pasta Products reported mixed results, with the decline in pasta sales being partially offset by volume increases in pasta sauces. Sales for the cheese, glue and continuing salty snacks businesses improved slightly versus 1994. Year to date operating income for CPP of $2.3 million decreased 97.3% from 1994 income of $85.4 million. International Foods, Niche Grocery and North American Pasta all reported declines in year-to-date operating results due to the reasons discussed for the quarter. Operating results for cheese were favorable to prior year, excluding the charge in third quarter 1994 to write-off goodwill, due to higher volume and reduced manufacturing costs. Results for glue and salty snacks were down slightly compared to prior year. Year to date sales for Dairy decreased 11.4% to $843.4 million from $952.0 million in 1994 as a result of the closure of several plants in late 1994, as well as volume declines in fluid milk and ice cream. Year to date operating results for Dairy improved 63.9% to a loss of $16.2 million from a loss of $44.9 million in 1994, due to improvements in controlling distribution and administrative costs, lower raw milk costs, and a $6.3 million reversal of unused restructuring reserves, partially offset by the $20.0 million charge for plant closings recorded in the second quarter of 1995. A significant portion of this cost savings relates to reduced depreciation and amortization expense as a result of the impairment loss recorded in December 1994. Year to date sales for Packaging and Industrial Products increased 17.2% to $1.73 billion from $1.47 billion in 1994, due to increases in substantially all of the businesses. Year to date operating income increased 15.2% to $147.3 million from $127.9 million in 1994, primarily due to strong operating results in worldwide resins and income from the Borden Chemicals and Plastics Limited Partnership, partially offset by the $20.0 million accrual for loss on disposal of a plant and weak sales of decorative products. 13 14 REORGANIZATION PLAN The Company is in the process of reorganizing its operating units into subsidiary form and expects the process to be completed in 1996. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities during the first nine months of 1995 was $33.5 million compared to $189.3 million for the first nine months of 1994. The decrease in cash flows used in operations is primarily a result of a reduction in the amount of receivables sold during 1994 of $140 million. Cash expenditures for new facilities and improvements to existing facilities were $124.3 million in 1995 compared to $102.0 million in 1994. Cash provided by the divestiture of businesses was $0.8 million in 1995 and $191.8 million in 1994. The 1995 proceeds include the sale of a dairy operation and 1994 divestitures consisted of the sales of the seafood, foodservice, jams and jellies, mashed potatoes, model kits, hobby paints, and various snack businesses. Investing and financing flows reflect the capital contribution by the Shareholders of $994.7 million, the sale of the $282.1 million investment in RJR Holdings stock, and the resulting reduction of short and long-term debt by $618.1 million and of minority interest by $471.5 million. The Company currently obtains financing through a $1.2 billion credit facility, of which $850.1 million is currently available. 14 15 PART II Item 1: LEGAL PROCEEDINGS Other Legal Proceedings - ----------------------- A former shareholder sued the Company in Federal District Court in the Southern District of Florida (8/95) claiming violations of Securities laws by failing to timely announce the proposed acquisition of the Company by affiliates of Kohlberg Kravis Roberts & Co. The Company was sued on November 1, 1995 in the United States District Court for the Southern District of New York by The Quaker Oats Company and one of its subsidiaries ("Quaker") in connection with the 1994 sale to Quaker of the Company's Brazilian pasta business for approximately $100 million. In this lawsuit, Quaker has alleged among other things, that the Company made misrepresentations and omissions to Quaker related to the amount of egg used as an ingredient by the Brazilian pasta business. Quaker has claimed that the Company's alleged actions and omissions constituted securities fraud, common law fraud, negligent misrepresentation and a breach of contract. Quaker is seeking rescission of its purchase as well as compensatory and punitive damages. The Company intends to vigorously contest these matters. There have been no material developments in the additional ongoing legal proceedings that are discussed in the Company's Forms 10-Q for the periods ended March 31, 1995 and June 30, 1995. The Company is involved in other litigation throughout the United States which is considered to be in the ordinary course of the Company's business. The Company believes, based upon the information it presently possesses, and taking into account its established reserves for estimated liability and its insurance coverage, that the ultimate outcome of the foregoing proceedings and actions is unlikely to have a materially adverse effect on the Company's financial position or operating results. 15 16 Item 6: EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits (10) Consulting Agreement dated August 21, 1995. (27) Financial Data Schedule SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BORDEN, INC. Date: November 13, 1995 By /s/ William H. Carter --------------------------------- William H. Carter Executive Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized signing officer) 16
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                                                                      EXHIBIT 10



                                                                 August 21, 1995


Borden, Inc.
180 East Broad Street
Columbus, Ohio  43215

Dear Sirs:

         This letter serves to confirm our retention by Borden, Inc. (the
"Company") to provide management, consulting and financial services to the
Company and to its divisions, subsidiaries and affiliates (collectively,
"Borden"), as follows:
         1.      The Company has retained us, and we hereby agree to accept
such retention, to provide to Borden, when and if called upon, certain
management, consulting and financial services of the type customarily performed
by us.  The Company agrees to pay us an annual fee of ten million dollars
($10,000,000.00), payable in quarterly installments in arrears at the end of
each calendar quarter.
         2.      We may also invoice the Company for additional fees in
connection with acquisition or divestiture transactions or in the event that
we, or any of our affiliates, perform services for Borden above and beyond
those called for by this agreement.
         3.      In addition to any fees that may be payable to us under this
agreement, the Company also agrees to reimburse us and our affiliates, from
time to time upon request, for all reasonable out-of-pocket expenses incurred,
including unreimbursed expenses incurred to the date hereof, in connection with
this retention, including travel expenses and expenses of our counsel.
         4.      The Company agrees to indemnify and hold us, our affiliates
and their and our respective partners, executives, officers, directors,
employees, agents and controlling persons (each such person,





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including us, being an "Indemnified Party") harmless from and against any and
all losses, claims, damages and liabilities (including, without limitation,
losses, claims, damages and liabilities arising from or in connection with
legal actions brought by or on behalf of the holders or future holders of the
outstanding securities of Borden or creditors or future creditors of Borden),
joint, several or otherwise, to which such Indemnified Party may become subject
under any applicable federal or state law, or otherwise, related to or arising
out of any activity contemplated by this agreement or our retention pursuant
to, and our or our affiliates' performance of the services contemplated by,
this agreement and will reimburse any Indemnified Party for all expenses
(including counsel fees and disbursements) upon request as they are incurred in
connection with the investigation of, preparation for or defense of any pending
or threatened claim or any action or proceeding arising therefrom, whether or
not such Indemnified Party is a party and whether or not such claim, action or
proceeding is initiated or brought by the Company and/or Borden; PROVIDED,
HOWEVER, that you will not be liable under the foregoing indemnification
provision (and amounts previously paid that are determined not required to be
paid by the Company pursuant to the terms of this Paragraph  shall be repaid
promptly) to the extent that any loss, claim, damage, liability or expense is
found in a final judgment by a court to have resulted from our willful
misconduct, bad faith or gross negligence.  You also agree that no Indemnified
Party shall have any liability (whether direct or indirect, in contract or tort
or otherwise) to Borden related to or arising out of our retention pursuant to,
or our affiliates' performance of the services contemplated by, this agreement
except to the extent that any loss, claim, damage, liability or expense is
found in a final, non-appealable judgment by a court to have resulted from our
willful misconduct, bad faith or gross negligence.
         You also agree that, without our prior written consent, you will not
settle, compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding to which an Indemnified Party is an
actual or potential party and in respect of which indemnification could be





                                       2
   3
sought under the indemnification provision in the immediately preceding
paragraph, unless such settlement, compromise or consent includes an
unconditional release of each Indemnified Party from all liability arising out
of such claim, action or proceeding.  
        Promptly after receipt by an Indemnified Party of notice of any suit, 
action, proceeding or investigation with respect to which an Indemnified Party
may be entitled to indemnification hereunder, such Indemnified Party will
notify the Company in writing of the assertion of such claim or the
commencement of such suit, action, proceeding or investigation, but the failure
so to notify the Company shall not relieve the Company from any liability which
it may have hereunder, except to the extent that such failure has materially
prejudiced the Company. If the Company so elects within a reasonable time after
receipt of such notice, the Company may participate at its own expense in the
defense of such suit, action, proceeding or investigation.  Each Indemnified
Party may employ separate counsel to represent it or defend it in any such
suit, action, proceeding or investigation in which it may become involved or is
named as a defendant and, in such event, the reasonable fees and expense of
such counsel shall be borne by the Company; PROVIDED, HOWEVER, that the Company
will not be required in connection with any such suit, action, proceeding or
investigation, or separate but substantially similar actions arising out of the
same general allegations or circumstances, to pay the fees and disbursements of
more than one separate counsel (other than local counsel) for all Indemnified
Parties in any single action or proceeding. Whether or not the Company
participates in the defense of any claim, both the Company and we shall
cooperate in the defense thereof and shall furnish such records, information
and testimony, and attend such conferences, discovery proceedings, hearing,
trial and appeals, as may be reasonably requested in connection therewith. 
        If the indemnification provided for hereunder is finally judicially 
determined by a court of competent jurisdiction to be unavailable to an
Indemnified Party, or insufficient to hold any Indemnified Party harmless, in
respect of any losses, claims, damages or liabilities (other than any losses,
claims,








                                       3
   4
damages or liabilities found in a final judgment by a court to have resulted
from our willful misconduct, bad faith or gross negligence), then the Company,
on the one hand, in lieu of indemnifying such Indemnified Party, and we, on the
other hand, will contribute to the amount paid or payable by such Indemnified
Party as a result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received, or
sought to be received, by Borden on the one hand and us, solely in our capacity
as an advisor under this agreement, on the other hand in connection with the
transactions to which such indemnification, contribution or reimbursement is
sought, or (ii) if (but only if) the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) but also the
relative fault of Borden on the one hand and us on the other, as well as any
other relevant equitable considerations; PROVIDED, HOWEVER, that in no event
shall our aggregate contribution hereunder exceed the amount of fees actually
received by us in respect of the transaction at issue pursuant to this
agreement.  The amount paid or payable by a party as a result of the losses,
claims, damages and liabilities referred to above will be deemed to include any
legal or other fees or expenses reasonably incurred in defending any action or
claim.  The Company and we agree that it would not be just and equitable if
contribution pursuant to this paragraph were determined by pro rata allocation
or by any other method which does not take into account the equitable
considerations referred to in this paragraph.  The indemnity, contribution and
expenses reimbursement obligations the Company has under this Paragraph shall
be in addition to any liability the Company or Borden may have, and
notwithstanding any other provision of this letter, shall survive the
termination of this agreement.
         5.      Any advice or opinions provided by us may not be disclosed or
referred to publicly or to any third party (other than Borden's legal, tax,
financial or other advisors), except in accordance with our prior written
consent.
         6.      We shall act as an independent contractor, with duties solely
to Borden. The provisions





                                       4
   5

hereof shall inure to the benefit of and shall be binding upon the parties
hereto and their respective successors and assigns.  Nothing in this agreement,
expressed or implied, is intended to confer on any person other than the
parties hereto or their respective successors and assigns, and, to the extent
expressly set forth herein, the Indemnified Parties, any rights or remedies
under or by reason of this agreement.  Without limiting the generality of the
foregoing, the parties acknowledge that nothing in this agreement, expressed or
implied, is intended to confer on any present or future holders of any
securities of the Company or its subsidiaries or affiliates, or any present or
future creditor of the Company or its subsidiaries or affiliates, any rights or
remedies under or by reason of this agreement or any performance hereunder.
         7.      This agreement shall be governed by and construed in
accordance with the laws of New York without regard to principles of conflicts
of law.
         8.      The terms of this agreement are effective as of January 1,
1995.  This agreement shall continue in effect from year to year unless amended
or terminated by mutual consent.
         9.      Each party hereto represents and warrants that the execution
and delivery of this agreement by such party has been duly authorized by all
necessary action of such party.
         10.     If any term or provision of this agreement or the application
thereof shall, in any jurisdiction and to any extent, be invalid and
unenforceable, such term or provision shall be ineffective, as to such
jurisdiction, solely to the extent of such invalidity or unenforceability
without rendering invalid or unenforceable any remaining terms or provisions
hereof or affecting the validity or enforceability of such term or provision in
any other jurisdiction.  To the extent permitted by applicable law, the parties
hereto waive any provision of law that renders any term or provision of this
agreement invalid or unenforceable in any respect.
         11.     Each of Borden and us waives all right to trial by jury in any
action, proceeding or counterclaim (whether based upon contract, tort or
otherwise) related to or arising out of our retention





                                       5
   6

pursuant to, or our performance of the services contemplated by this agreement.

         12.     It is expressly understood that the foregoing paragraphs 2-5,
10 and 11 in their entirety, survive any termination of this agreement.
         If the foregoing sets forth the understanding between us, please so
indicate on the enclosed signed copy of this letter in the space provided
therefor and return it to us, whereupon this letter shall constitute a binding
agreement among us.
                                        Very truly yours,

                                        Kohlberg Kravis Roberts & Co.


                                        By:    /s/ Clifton S. Robbins  
                                             ------------------------------
                                        Title: General Partner


AGREED TO AND ACCEPTED


Borden, Inc.


By:    /s/ William H. Carter  
    --------------------------------
Title:  Executive V.P. & Chief
        Financial Officer





                                       6
 

5 1,000,000 9-MOS DEC-31-1995 SEP-30-1995 130 0 651 16 575 1,516 2,798 1,617 3,889 1,293 1,228 2 0 614 228 3,889 4,489 4,489 3,385 3,385 0 0 107 (155) (57) (98) 76 0 0 (63) (.33) (.33)